New Boss at the FASB

Bruce Krasting's picture
Bob Herz, the Chairman at FASB quit last week. He will be gone by
October. No explanation from anyone on the abrupt departure. My question
is does this mean that there will be a change in the direction and pace
that FASB is moving? IMHO FASB has been doing pretty well on the
“direction” issue. The “pace” however has been glacial.

Two critical issues are on the table. The integration of international
standards with US standards and the upcoming changes in lease
accounting.

Leslie Seidman has been appointed the new Chairperson at FASB. She has
excellent credentials. She knows FASB (been there since 2003). I liked
what she said had to say in an interview with WEBCPA.
She seems up to the challenge. Of interest/importance is that Leslie is
also the point person on the changes to lease accounting. If she
prevails on this one it will prove she is a tough cookie.

I think 95% of the S%P 500 hates the draft plans. The financials totally
hate it. Big shots like GE are going to be hurt by this. The
accountants don’t like it at all. It makes it more opaque. Why would an
accountant want that? Finally, it is not clear to me that the SEC is
behind the proposed changes.

I think the new rules make a lot of sense (but I am not an accountant).
It relies on a PV method of evaluating a lease. The longer the lease,
the greater the impact. A two-year lease has a much smaller balance
sheet impact than a thirty-year lease. Seems simple. But it will have
very significant BS consequences to some very big players.

Ms. Seidman will have some stiff opposition. I wish her well. Some cut and pastes from the interview:

CPA: Do you think there will be a lot of criticism of the proposal from companies that expect to take heavy losses or who are warning that it’s going to depress the market for commercial property leasing, that landlords are going to have to start re-negotiating leases with their tenants, or tenants with landlords?

LS: I accept that potentially putting
amounts on the balance sheet can affect leverage and ratios and things
like that. We understand that most investors have been trying to do a
pro forma adjustment to put these things on the balance sheet, and so
it’s a question as to how big a surprise these amounts are going to be.



BK: Oh boy! I hear all the time that “analysts’ have this figured
out and there will be no surprises if and when the standards are
adopted. Wanna bet? Here is an opportunity for the analysts. Answer
this. If the standards are adopted what is GE’s pro-forma BS? An estimate to the nearest $200b will do. It is currently ~$650b. Will it go to $1 trillion? $1-1/2 trillion?

CPA:
How do you think it’s going to affect the airline companies now that
they’re going to have to start putting these leases on the balance
sheet?

LS: If you have relatively long-term leases, then you will have potentially significant amounts.

BK: Don’t all airlines have long-term leases?

CPA:
Is it possible that the leasing standards might be deferred for certain
industries, say if the airline industry had a lot of problems adjusting
to certain standards or the commercial property industry had problems
adjusting? Would it be rolled out differently by industry?
LS: We’re very interested in hearing from all constituents about what they think of the proposal, how operational it is, whether they think it’s producing information that’s useful for their investors, etc.

BK: Gulp. I really wish she had answered this; “No”. Asking the “constituents" whether “investors” are going to get “useful”
information is like asking a bank robber for financial advice. Opening
the door for special groups (AKA GE) to get a hall pass on this would
make it a joke.

 

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mynhair's picture

Oh, get real.

http://www.youtube.com/watch?v=upvZdVK913I

Byte me.

You think your pissant views are worth shit.

Vote McLame.

 

whiteshadow's picture

starbucks, cvs, macdonals...all these that operate on franchise basis will hurt a lot ...i found one good article as to the effect of this change (if it does take place)..in regards to cvs....http://accounting.smartpros.com/x54320.xml

 

Rusty_Shackleford's picture

Any of you guys see this little gem from FASB's James C. Blaine via Dealbreaker Blog?

 

http://dealbreaker.com/2010/08/other-than-that-i-have-no-concerns/

Janice's picture

Love it!  Who says CPAs don't have a sense of humor?

Janice's picture

I have not read the exposure draft and do not know if the leasing rules apply to real property, capital leases, operating leases, equipment leases, precious metals leases, all leases, few leases; however, there is always an alternative.  If I were a smart bang-up CPA, I'd call my cousin and ask him/her to form a non-public company (LLC) that will enter into these long term leases and in turn, my company will have a two year lease with my cousin's company for said leased product.  Problem solved, money stays in the family, balance sheet white as snow.  Next.

mynhair's picture

I can't take it anymore.

I propose a new graduation ceremony for all Haavad, Yale, Princeton, (insert worthless school here), grads.  Line 'em up on the outside of the 'Nam Memorial. take the pics, then AK-47 them all.

Beteween graduation classes, work on the Alums.

 

Nope, not gonna delete it.  You guys can.  Lease BS.

Thanks, Bruce, for making me lose it.

taraxias's picture

Nothing will change, Bruce, these people are already compromised.

Of more interest is to find out why Bob quit "abruptly" IMO

Keep up the GREAT work on here BTW

Careless Whisper's picture

could be the usual reason... a job offer from squid

Shiznit Diggity's picture

The dude's name is Bob Herz, not Fred Hertz.

Bruce Krasting's picture

Jeepers! Thanks for that. I fixed it.

I fired my old copy editor. She was 22 and constantly made mistakes....

The new one is very nice. 32. Size 2. Fit. She doesn't know Bob Herz from Fred Hetz either. But I don't care. She stays...

Who the hell is Fred Hertz anyway?

bk

Double down's picture

Bruce

I double what exportbank said above.  You post good stuff.

sgt_doom's picture

Jaysus!  Mine too.

That's the last time I allow a 6'8" female basketball player to pick me up in a fern bar.

(They appear shorter when you're standing on the bar stool, BTW.)

tony bonn's picture

fasb is a corrupt, compromised, filth laden den of liars....you can take the liar out of fasb but you can't take fasb out of the lie.....

give me some more off balance sheet mark to myth horse crap....

exportbank's picture

Bruce - I compliment your posts.. Everything you've put on ZH has been worthwhile, interesting and poignant.

Accounting and ratings agencies have been at the forefront of the frauds that bring us to this juncture. A balance sheet has become a playground of obfuscation, a place to hide in plain sight and if the cloak isn't dark enough - you move off balance sheet. The current rules (what rules) work against truth and honesty and encourage theft and aberration. The guys I know that loved mark-to-market on the way up now want to disown it on the way down.

Johnny Bravo's picture

First, I agree.  Bruce's posts are always the shit.

The problem with accounting laws is that the FASB is a private sector board, and they only answer to... the SEC!

How can you expect people looking at tranny porn to regulate financial markets AND accounting?

Mitchman's picture

Bruce, everyone is focused on the lessee side here and all of that off balance sheet debt-as well they should be.  But the reason the banks and GE hat this is how it affects the LESSOR side of the business.  All the rating agencies have some model that, no matter how inefficiently, recapitalizes leases on the balance sheet.  It is the LESSORS like the bank-affiliated leasing companies and the industrial-affiliated lessors like GECC who are going to have to bring At LEAST a $1 trillion of debt back onto their balance sheets.

I am happy to expand if someone is interested.

WorkingFromHome's picture

Sorry, would not be bringing debt on the balance sheet, rather a performance obligation.  There is a difference and you should know that.

 

Additionally, nobody was focusing on the lessee side, everyone was focusing on the lessor side.

max2205's picture

Same as the old boss....

Howard_Beale's picture

Mark-to-myth makes me want to puke. Leasing accounting rules, while important, will most likely get shot down by bank and corporate lobbyists working the critters.

We wouldn't want to know the real value of anything now, would we? /sarcasm.

Johnny Bravo's picture

Well they just structure the lease agreements so that they don't have to book it at the actual value anyway... 

Chartist's picture

When I think about all the hoopla over the passage of Sarbanes-Oxley and then the recent free pass given to Jeff Immelt, it makes me want to puke.

Double down's picture

SOX today is a gutted, rotten, bear gnawed carcass.  Was overblown but great once upon a time.   

Johnny Bravo's picture

Well, the problem in my opinion is that companies have a choice between reporting assets as fair value or as historical value.

What that means is that they can report the asset as its historical value, say, if they bought it in 2006 at the height of the property bubble, instead of having to take the balance sheet loss by marking it to market at fair value.

It's like me buying a stock, it falling 50%, and then me keeping it on a balance sheet at 100% of its purchase price.
Investors in these types of companies (especially REITs) should be outraged!

RockyRacoon's picture

Brilliant!  Just brilliant!

Johnny Bravo's picture

Yeah, it's quite the b.s. for sure!

I'm glad I'm going to be a CPA soon, because I'm going to get paid for these kinds of shady dealings... LOL

Robslob's picture

Is that financials in "Mandarin"?

l0nEr's picture

nope. it just means "clear" in Mandarin.

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